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Elite Law Firm Mergers and Reputational Competition: Is Bigger Really Better? An International Comparison

Posted by on Thursday, August 16, 2012 in Articles, Vol. 40 No. 3, Volume 40, Volumes.

Although rapid law firm growth has persisted since the 1980s, the acceleration of this trend over the last decade by means of mergers is puzzling.  Why would normally conservative law firms embark on a merger strategy that appears to encompass significant risk and uncertain benefits?  Is this trend a peculiarly U.S. phenomenon?

Most of the popular explanations for law firm mergers focus on a single factor: Law firms everywhere cite strikingly similar reasons based on a presumed client demand for “one-stop shopping.”  This Article contributes to providing a more robust, multi-causal explanation for law firm behavior through a comparative study of reputational competition among elite law firms in selected jurisdictions—the United States, the United Kingdom, Germany, Australia, and Japan.  It posits that industry consolidation and changing market conditions have intensified law firm competition and that since firm quality is hard to measure, law firms compete largely on the basis of reputation.  Due to their risk-averse nature and the fear of losing existing clients, many law firms are thus paradoxically driven to engage in (defensive) mergers to meet the competition.

Through an examination of reputational competition, the Article considers circumstances that are likely to lead to mergers, particularly the elements of reputational signaling, herd behavior, and reputational status as “first-tier” law firms. It identifies “rules of the game” for firm behavior with respect to international mergers.  The Article finds that the impact of a strategic decision, such as a merger, by a first-tier firm is of far greater significance than a similar action by another elite firm and is much more likely to lead to defensive actions, such as mergers, by competitor firms.  Thus, which firms engage in merger activity in a given market is an important factor in explaining and predicting both the reaction of competitors and whether mergers will become widespread in that market.

This Article further suggests that the common phenomenon of law firm mergers is likely a result of law firms reacting to similar types of changes in their operating environment (i.e., a parallel development), rather than convergence to a U.S. model of the law firm.

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